How Annuity Surrender Fees Work

Planning for retirement means making sure your money lasts—and that it’s protected along the way. For individuals who value stability and guaranteed income, one option to consider is an annuity as part of an insured retirement strategy. Learn how annuities fit into a retirement plan.

In addition to offering principal protection, low volatility, and tax-deferred growth, annuities can provide guaranteed lifetime income. That income stream helps create predictable, steady cash flow throughout retirement.

However, there are important contract terms you need to be aware of—especially surrender charges. These fees can apply if you take out money early or cancel the contract before a set period ends. Let’s break down what surrender charges are and why they matter.

What is an Annuity Surrender Charge?

Surrender charges are penalties applied when you withdraw too much money—or cancel your contract—during the annuity’s “surrender period.” This period often lasts between 5 and 15 years.

The fee is calculated as a percentage of the withdrawn amount. To allow some flexibility, most deferred annuities include a “free withdrawal” feature. This provision lets you take out a limited percentage of your contract value—often up to 10% annually—without a fee.

Why Do Insurance Companies Charge Surrender Fees?

There are several reasons insurers include surrender fees in annuity contracts:

• They encourage owners to commit to the long-term nature of the contract.
• They help insurers maintain the contractual guarantees and dollar-for-dollar reserves supporting your annuity.
• They protect the insurance company’s financial strength and stability.
• They prevent a sudden influx of withdrawals that could disrupt long-term investment allocations—similar to how bank runs threatened financial institutions in the past.

When you purchase a deferred annuity, the insurance company invests most of your premium into conservative, long-term vehicles such as investment-grade bonds. Early withdrawals force insurers to liquidate those positions prematurely, which can result in losses. Surrender charges help offset this disruption.

Thanks in part to these fees, your annuity may earn interest that exceeds the returns of traditional safe vehicles like CDs or savings accounts.

How Much Do Surrender Charges Cost?

The surrender charge schedule varies by contract but typically starts between 7% and 10% of the withdrawal amount. Charges may be fixed or decline each year throughout the surrender period.

Here’s a typical declining schedule:

• 10% in Year 1
• 9% in Year 2
• 8% in Year 3
• 7% in Year 4
• 6% in Year 5
• 5% in Year 6, and so on

Example: Let’s say you contribute $100,000 to a deferred annuity. One year later, you need to withdraw $16,000 due to an emergency. If your surrender charge is 10%, you would pay $1,600 in fees. That $16,000 would also be taxable, and if you’re under 59½, the IRS would add a 10% penalty on top.

What About Contract Bonuses?

Some annuities offer premium bonuses—typically between 5% and 10% of your initial deposit. However, these bonuses usually must be repaid if you surrender the contract early.

In this case, the surrender penalty may include both the regular fee and the forfeited bonus. For example, if your contract has a 10% surrender charge and a 10% premium bonus, surrendering early could trigger a 20% penalty.

Can I Still Get My Money if There Is a Surrender Charge?

Yes, you can access your money early—but doing so will likely trigger surrender charges and tax penalties. That’s why annuities are best suited for long-term goals and stable income planning.

Before committing, assess whether you have enough liquid assets elsewhere to handle emergencies or unexpected needs. If there’s a high chance you’ll need access to these funds early, a different financial tool may be more appropriate.

Also, make sure that the funds you allocate to the annuity won’t interfere with your regular cash flow or lifestyle needs. Always keep a sufficient emergency fund as part of your broader retirement strategy.

FAQs on Annuity Surrender Fees

• Can I avoid surrender fees?
  Only by waiting until the surrender period ends or using the contract’s free withdrawal allowance.
• Do all annuities have surrender charges?
  Most deferred annuities do. Immediate annuities typically do not—but you give up access to your principal.
• Can I get access in a hardship?
  Some contracts allow waivers for terminal illness or nursing home care. Terms vary by provider.

Surrender charges are just one piece of the annuity puzzle. These contracts are designed for long-term use, offering guaranteed income and principal protection—but they come with trade-offs in liquidity and timing.

If you’re seriously considering an annuity, take time to read the contract. Understand the surrender fee structure, when it applies, how much it costs, and whether early withdrawal could lead to additional taxes.

Being informed helps you ask better questions and make confident decisions. Foxcove Financial can help you evaluate insured IRA options, annuity strategies, and how surrender charges may align with your long-term income goals.